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Hedge Fund Survival: Non-Normal Returns, Capital Outflows, And Liquidity

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  • Naohiko Baba
  • Hiromichi Goko

Abstract

We analyze the factors that influence the survival probability of hedge funds reported in the Lipper TASS database. Particular emphasis is placed on (1) non-normality of returns and assets under management (AUM), (2) short-term capital outflows, and (3) liquidity constraints associated with a hedge fund's cancellation policy. Estimation results using the Cox proportional hazards model and the panel logit model show that (1) funds with lower skewness in returns and AUM, (2) funds experiencing instantaneous rapid capital outflows, and (3) funds with a shorter redemption notice period and a higher redemption frequency have significantly higher liquidation probabilities, among others. (c) 2009 The Southern Finance Association and the Southwestern Finance Association.

Suggested Citation

  • Naohiko Baba & Hiromichi Goko, 2009. "Hedge Fund Survival: Non-Normal Returns, Capital Outflows, And Liquidity," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 32(1), pages 71-93.
  • Handle: RePEc:bla:jfnres:v:32:y:2009:i:1:p:71-93
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    1. Brown, Stephen J & Goetzmann, William N & Ibbotson, Roger G, 1999. "Offshore Hedge Funds: Survival and Performance, 1989-95," The Journal of Business, University of Chicago Press, vol. 72(1), pages 91-117, January.
    2. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
    3. Scholes, Myron, 2004. "The future of hedge funds," Journal of Financial Transformation, Capco Institute, vol. 10, pages 8-11.
    4. Greene, Jason T. & Hodges, Charles W. & Rakowski, David A., 2007. "Daily mutual fund flows and redemption policies," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3822-3842, December.
    5. Stephen J. Brown, 2001. "Careers and Survival: Competition and Risk in the Hedge Fund and CTA Industry," Journal of Finance, American Finance Association, vol. 56(5), pages 1869-1886, October.
    6. Baquero, Guillermo & ter Horst, Jenke & Verbeek, Marno, 2005. "Survival, Look-Ahead Bias, and Persistence in Hedge Fund Performance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(03), pages 493-517, September.
    7. Fung, William & Hsieh, David A., 2000. "Performance Characteristics of Hedge Funds and Commodity Funds: Natural vs. Spurious Biases," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(03), pages 291-307, September.
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